Let’s face it – employees steal things! Okay, maybe it’s just the occasional pen, pencil or ream of computer paper, but sometimes it’s a $1,000 set of Michelin tires or thousands of dollars in cash from credit refunds. Need, want, jealousy, or just a perceived justification for deserving more compensation are some of the more common reasons given for taking something that isn’t yours. Whatever the reason for stealing, parts departments are high on the list for providing the opportunity for employee fraud. Small parts are easily convertible into cash and with lax controls a fraudster can easily carry your hard-earned profits right out the back door.
Here are some steps you can take to deter fraud in your parts department:
Maintain Accurate Records
Good record-keeping habits are essential to preventing fraud. Is your inventory system up-to-date and accurate on a daily basis? It had better be or you are opening the door for fraud. Make sure that you not only have strict record-keeping processes in place but that those processes are enforced and reviewed periodically by management.
If your inventory records show that you have five sets of #89051964 brake pads - do you really have five sets of this part number? You won’t really know unless you perform inventory counts. If you do not know what you have on hand, then you will not know if or what inventory has gone missing.
You should perform a physical count of your inventory at least once a year. In addition to annual counts, you should perform test counts of high-dollar and fast-moving parts randomly throughout the year. Have someone outside of your service department assist with or perform this procedure. This introduces an independent cross-check into the process. Periodically change the person who performs the count. This will help protect against cases of employee collusion.
Reconcile Count Results to the General Ledger
Make sure you get the full benefit from an inventory count by reconciling the results to your accounting records and trending results to investigate variances. If you are just in the habit of adjusting your records based on physical counts and do not investigate variances, you are inviting employees to steal.
Unlock the Power of Built-in Reports and Controls in Your DMS and/or Accounting System
Do you really understand how to use the trending reports and inventory control reports already available to you? Maximizing the use of these systems can help you investigate variances and quickly determine when a fraud issue may exist. Nearly all DMS systems have reports that provide good controls over purchasing, receiving and invoicing and good trend analysis. Odds are you are not using your system to full capacity. If not, ask for help. Accountants are especially good at getting reports to reconcile to physical inventory and reviewing trend analysis. This is what they do all the time and is also why they need you to fix their cars (they are too busy with calculators to learn auto mechanics).
Tighten Controls for Credit Memos, Parts Returns and Other Order Adjustments
Pay attention to returns and credits! The most common schemes here are to record a fake return transaction, and then, keep the money. Or, after recording a return, to record a fake purchase for the refund amount and keep the parts. Sometimes employees lower the labor costs and then add in additional parts to balance to the estimate. The added parts are then shown the back door.
Tighten your controls by requiring a manager or another individual other than the issuer to sign-off for credit memos and other unusual order adjustments. Require detailed customer information for refunds – name, address, phone number. Randomly call to verify that returns are legitimate. Document any returns to the manufacturer or supplier and check against any credits. These few small steps can have a huge impact on deterring a parts department fraud opportunity.
Limit Access to the Parts Area
Only your parts personnel should have access to the parts area. If another employee needs access, it should only be with clear authorization from management and accompaniment by parts personnel. In addition, barriers such as “restricted area” signs and locks should be used to enforce limited access. By limiting access to the department you can limit the opportunity to commit fraud outside of the department.
Pay Attention to the Behavior of Your Employees
Employees who are stealing from their employers often display behaviors and characteristics that might indicate a fraud is being committed. Unfortunately, these behaviors are painfully obvious once you know that a theft has occurred, but are often overlooked as indicators of a fraud.
Here are a few common noted behaviors of parts fraudsters that you should pay attention to: Employees that spend an inordinate amount of time online or on their cell phone, which is not part of their job requirement; employees just hanging around seemingly being nonproductive; employees that complain about a lack of authority or who are negative all the time; employees that moonlight or work at other shops or frequently fix cars for friends and family; and employees living beyond their means or facing financial difficulties.
Individually, traits such as these are not conclusive of a fraud. However, you should be alert to the possibility that these behavioral red flags could be indicators that an employee is engaged in an ongoing fraud.
Setting the Tone At The Top – Your Behavior
Pay attention to your own behavior. Do you circumvent the rules? Are you taking parts for you own vehicle or a friend’s vehicle without going through proper procedures? When you circumvent the rules that your employees must follow, you encourage the attitude that “rules do not really matter.” Expect employees to follow your behavior, not your rules. If you don’t set the tone at the top that you have strict rules and procedures in place for everyone, than you are inviting fraud into your parts department and encouraging dishonest employees to walk out with profits.
Written by Frank A. Wisehart, MBA, CPA/ABV, CFE, CVA, Director of Business Advisory Services at Schneider Downs and Kathy Donahue Petrucci, CPA, MT, Tax Shareholder at Schneider Downs.
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